What to make of Biden’s fiscal policy?

A distinction must be drawn between the USD 1.9 trillion stimulus package and the USD 2.25 trillion public investment plan. Many are asking whether the stimulus package is too big. But the problem in reality is that the fiscal multiplier associated with the plan is very low, at just over 0.2: with 9 percentage points of GDP of public money injected into the economy, the forecast for US growth has been revised upwards by 2 percentage points. A large share of the public transfer payments will either be saved or lead to imports. The stimulus package will therefore add fuel to the stock market bubble and worsen the US trade balance, with a minor effect on production , which is therefore open to criticism , but the problem is not that it is too big (or that it poses an inflationary risk for that matter). The public investment plan includes investments in infrastructure (bridges, ports, airports, totalling USD 620 bn), water, the electrical grid, telecoms (USD 110 bn), the renovation of buildings, schools, childcare centres (USD 210 bn), an increase in spending on healthcare and the elderly (USD 400 bn), support for industry and for reshoring (USD 300 bn), spending on R&D (USD 110 bn) and vocational training (USD 100 bn). It will be financed mainly by taxing corporate earnings. The question is therefore whether the investment plan’s positive effects on potential growth will outweigh the negative effects of the tax increase. The answer is probably yes, given the low initial level of US corporate taxes and the high profitability of US companies. This leaves the effect that the two plans will have on the rest of the world. The increase in US imports is obviously positive, the amplification of the stock market bubble negative. The important point is that in order to finance its deficits, the United States is going to have to attract a growing share of the rest of the world’s savings (mainly from the euro zone and emerging countries other than China and oil exporters). From a global perspective, this is an inefficient allocation of global savings; it is bad for the euro zone and for emerging countries, which could have invested these savings domestically.